February Results UGH

More bad market news. When will it end, or just stop going down? Barron's over the weekend suggested that a major rally is due because of the over-sold condition of the market. Art Cashin appears on CNBC every morning to give a trader's market take--he's the head of floor operations for UBS (been on the floor for decades)--he thinks the market is due for a good bounce...alright then, bring it on. Here are February's performance numbers as published by Investment Advisor Magazine:

The Monthly Index Report for March 2009

Index	Feb-09	QTD	YTD	Description
S&P 500 Index*	-11.0%	-18.6%	-18.6%	Large-cap stocks
DJIA*	-11.7%	-19.5%	-19.5%	Large-cap stocks
Nasdaq Comp.*	-6.7%	-12.6%	-12.6%	Large-cap tech stocks
Russell 1000 Growth	-7.5%	-12.0%	-12.0%	Large-cap growth stocks
Russell 1000 Value	-13.4%	-23.3%	-23.3%	Large-cap value stocks
Russell 2000 Growth	-10.4%	-17.2%	-17.2%	Small-cap growth stocks
Russell 2000 Value	-13.9%	-26.2%	-26.2%	Small-cap value stocks
EAFE	-10.2%	-19.0%	-19.0%	Europe, Australasia & Far East Index
Lehman Aggregate	-0.4%	-1.3%	-1.3%	U.S. Government Bonds
Lehman High Yield	-3.1%	2.7%	2.7%	High Yield Corporate Bonds
Calyon Financial Barclay Index**	-0.2%	0.4%	0.4%	Managed Futures
3-mo. Treasury Bill***	0.0%	0.0%	0.0%
All returns are estimates as of February 27, 2009. *Return numbers do not include dividends. ** Returns are estimates as of February 26, 2009.

2009 IRS Numbers

For 2009, the maximum contribution for 401k/403b plans is $16,500 for employees younger than 50 years old and $22,000 for those 50 or older if the plan allows for catch-up contributions. The annual gift tax exclusion is $13,000 per person. The estate tax exemption for this year is $3.5 million. If there is any way to save a little bit more in your retirement plan, now would be a good time to do it. Seems like saving is in vogue again (thank goodness), there is no better way to get a tax break and be able to buy investments at levels that, by most standards, are below intrinsic value than by contributing more to your retirement plan. Even $50 extra a month is worth it.

A New Year

If you are looking for more negative viewpoints or insights, you won't find them here. We all know by now that 2008 was the worst year for the market in 79 years--only 3 other times has the market been down more than 40% in a year. Of course, the only thing most of us care about is: when will it stop? Things looked pretty good until last week--we had very inconspicuously gone up by 20% from the November lows--now the market still stands at 5% above those same lows. That's how the market rebounds, slowly, quietly without fanfare. David Swensen, the manager of the Yale endowment fund who has written several books on investing and has had an average annual return of something like 15%, was interviewed in the Wall St Journal last week. In the interview, Swensen made an excellent point: you either have an aggressive portfolio that does well most of the time over the long term or you have a portfolio that is defensive whose goal is to not lose money. If you have a long term portfolio you have to expect there will be times you will lose money. We can't change what happened in the past-but we can affect the future by our behavior today. History has shown when the market is down and there is "blood in the streets" it is the wrong time to get more conservative, it's the time to get more aggressive actually. I know this concept is difficult because of the emotions--and I know I'm getting a little long in the tooth with my optimism--but I know this market will just one day, quietly, slowly without anyone really noticing start to go up in leaps and bounds. Research has shown if you are uninvested (sitting cash until the market stabilizes) and miss the best 10 days in a market rebound, your overall return will be diminished by 10%-30%. Hopefully we won't have to live through too many more 2008's in our lifetimes.

Positive Notes

Well, there isn't much point in restating what everyone already knows. What the market has experienced over the past two months and over the past year is unprecedented. All the bad news is out there--no need to recap here. What I want to focus on are a few (very few) positive things. First, inflation readings are actually negative. For anyone who has filled their gas tank the past month, WOW what a nice surprise from last spring. That's extra money in your pocket to spend, save or pay down debt. This is a huge help to consumers during these difficult economic times. Second, the economic recession officially started last December. The average recession has historically lasted 16 months--I do believe we are at the tail end of this rather than the beginning or middle. I know history has not been a good gauge lately but all this money the government is putting into the economic system will have a continued positive effect. Lastly, from a pure valuation standpoint, there are bargains to be had in both the bond markets and the stock market. Remember, bear markets mark a time when you should be taking more risk rather than becoming more conservative which is the exact opposite of what human behavior would dictate.

Words of Wisdom

In Monday's WSJ page A19, Opinion page, Burton Malkiel wrote a piece titled "Keep your money in the market". Mr. Malkiel is a professor of economics at Princeton University and best known as author of "A Random Walk Down Wall Street", a book that is fundamental reading for anyone interested in the art of investing. He writes, "A century of investing experience, as well as insights from the field of behavioral finance, suggest that investors who bail out of equities during times like theses are almost always making the wrong decision". He mentions that "the herd instinct is extraordinarily powerful": we think other people must be smarter than us, that's why they are selling and that's why we should sell. He suggests, that regular rebalancing and review of a portfolio occur on an annual basis and at that time, changes are made, rather than as a response to fear and despair over market conditions.
In Wednesday's WSJ, James B. Stewart compares bubbles and panics and how similar they are as they both measure extremes in the market. He chronicles the anxiety he felt entering a buy order when the market was tanking and then watching the market go down even more---not a good feeling, I know, I did the same. But I know as does he, that in the long term, markets go up. A financial crisis is about courage and about discipline of staying the course. If I knew when the market was going to hit a high to sell and when it hits a bottom to buy, I would be a very rich person today. Truth is, it is virtually impossible to time the markets, to know when to get in and when to get out. You set your course, structure your portfolio and make changes as life and circumstances dictate. I am here to help you stay the course.
Today, there are more fantastic investment opportunities available than we have seen in a decade. Municipal bonds are cheap, closed end funds are cheap stocks are cheap commodities are cheap--the only one thing that is not cheap are treasury bills and bonds. Everything else is on sale!!
Just thought it would be nice to counter what we hear on the TV all day long.

3rd Quarter in the Red

87% of all mutual funds posted losses for the year ending 9/30/2008, this according to an article in the Washington Post which you can find here: http://www.washingtonpost.com/wp-dyn/content/article/2008/10/04/AR2008100400157.html
I think the worst part of this horrible bear market we are in and probably how it is the most dissimilar from previous bears, is that nothing seems to be doing well--except maybe Treasury bonds. Commodities, international, small cap, real estate...asset classes that are normally not perfectly moving in sync with the large cap equity markets, are all down....no safe havens. There are a few silver linings here, at least that I can see: the VIX which is a measure of volatility and often dubbed the "Fear Index" is at a very high level. This high level indicates an extreme in the market, which usually doesn't last too long. The S&P 500 right now is at 1048.9 which is down -28.8% year to date and down -32.98 from the high reached last October. The average downside for bear markets is in the -30% to -35% range.....we just need a few more people, besides Warren Buffet to see that there is value in the market and begin to buy. Notice however, that Mr. Buffet sees this debacle as a buying opportunity, not a selling opportunity, which is what made him a very wealthy person. Buffet is 78 years old and has seen many decades of different types of markets. Like him, I have faith in the markets and am optimistic.

A note on money market funds

A few people have asked me about money market funds and whether we should start worrying about their safety. Last week's news of the Prime Reserve fund "breaking the buck" added to the worries of the week's unfolding disasters. This fund in particular wrote down the market value of some Lehman securities it owned which resulted in a 3 penny loss in net assets value from $1 to $.97, or a 3% loss. An investor who held the fund for a year probably had earned about 4% in interest payments over the course of the year and so netted against the 3% loss is still up about 1% for one year. In the whole scheme of things, this isn't the worst thing that could happen. However, money market funds' $1 net asset value (NAV) is held sacred by investors and money market providers alike. In the past when a money market fund faced the predicament of losing value, usually the mutual fund provider injected capital to make up for any loss. Presently, this option may be difficult given the current liquidity crisis in the fixed income markets. However, I believe that mutual fund companies like Vanguard, Fidelity and TRowe Price in particular would be in a position to infuse capital to one of their money funds if necessary as they have escaped many of the problems that have plagued the banks and investment banking firms who have been writing off bad mortgage loans and bonds backed by bad mortgage loans. To safeguard any further issues with losses in money market funds, the government has made insurance available for purchase by any provider that wants it--up to 50 billion in insurance is available. All of the steps taken by both the Treasury and the Federal reserve have been done to restore confidence in the financial system. So be confident.

On another note, the SEC has banned short selling on 799 financial stocks until October 2, 2008. While some (especially short sellers) think this step draconian, I do think it is the right action at this time. Hopefully the SEC will reinstate the uptick rule which forces anyone who wants to sell any stock short to wait for an uptick in price before selling. This does mitigate downward spiral of stock price in a bear market as it just "slows down" trading and pessimism. The uptick rule was eliminated last year---I don't know why. The short sellers are I believe partly to blame for this fiasco because lower stock prices mean that companies, like AIG, cannot raise adequate capital in the equity markets: their stock price is too low.

I think we are headed in the right direction with the Treasury trying to get Congress to pass a bill that will ultimately buy all of these bonds that no one seems to want. What this will cost to US productivity and economic growth in the long term remains to be seen. It is kind of like trying to put out a 5 alarm fire and worrying about what the water damage will be--can't worry about that now, let's just put out the fire.

Better days are coming...may they get here soon.